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Answer to Question #43477 in Macroeconomics for reema

Question #43477
In the recent years, the United States has had a very low savings rate (the percentage of GDP that is saved nationally in a given year), but has attracted much foreign investment. Some economists say this is a danger to long-run growth, but others disagree. Give your opinion and justify your reasoning.
Expert's answer
Policy of even lower rates may be damaging to the long-term growth prospects of the US economy. Low rates discourage saving – the US gross savings  rate is currently around 10 per cent, which is 6 percentage points below GMO’s estimated “prudent” savings level. Mr Bernanke’s grand monetary experiment also creates uncertainty. Perhaps this explains why US companies, although flush with cash, refuse to invest. Very low interest rates also hinder the process of “creative destruction”. Since the mid-1990s, Japan’s zero-interest rate has kept businesses with poor profitability on life support while banks “evergreen” potentially non-performing loans.

Not only do low interest rates threaten future income growth for American workers, they promote social discontent. As Mr White observes, leveraged speculators have been the prime beneficiaries of the Greenspan/Bernanke era of easy money. Prudent savers, on the other hand, suffer from negative real returns on their cash and fixed income investments. Mr Bernanke’s low rates are delivering what Keynes gleefully termed the “euthanasia of the rentier class”. Low rates have not even brought enduring benefits to the least advantaged, who have suffered most from the housing crisis and from subsequent high levels of unemployment. There is a growing sense that the distribution of economic spoils has become unfair.

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